Top Five Small-Cap Stocks

Each weekday, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list, updated daily, is based on data from the close of the previous trading session. Today, small-cap stocks are in the spotlight. These are stocks of companies that have market capitalizations of between $50 million and $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.

The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.

Rated a buy since December 2005, American Software ( AMSWA) develops software and services for enterprise management and collaborative supply chains. Strong EPS growth over the past year has helped the company's stock price appreciate faster than the S&P 500.

Barring a major bear market, the stock should continue to move higher. The company has no debt to speak of, and maintains a quick ratio that demonstrates the ability to cover short-term cash needs. While American Software may harbor some minor weaknesses, they are unlikely to have a significant impact on results.

A buy since May 2005, Waste Industries USA ( WWIN) provides solid-waste collection, transfer, disposal and recycling services to commercial, industrial and residential customers in six states in the Southeast. It has demonstrated improved operating margins due to pricing initiatives, higher productivity gains and increased internalization of waste into its landfills. The company also completed acquisitions in South Carolina and Georgia that will boost hauling revenue and strengthen its routes in desired markets.

The solid-waste industry is very competitive and requires considerable labor and capital resources, and it is subject to extensive federal, state and local environmental laws and regulations. For these reasons, any changes in the economic, legal or regulatory environment could hurt Waste Industries' future financial performance.

Multi-Color Corp. ( LABL) supplies decorative labels and packaging services to consumer product and food and beverage companies, retailers and container manufacturers. The company has been rated a buy since February 2006. Multi-Color displays significantly increased net income and notable stock price appreciation with good potential for further growth. The market expects EPS growth in Multi-Color's fiscal 2007. These strengths outweigh the company's low profit margins.

Consolidated Water Co. ( CWCO), which operates seawater desalination plants and water distribution systems, has been rated buy since December. The company has a largely solid financial position with reasonable debt levels, and good cash flow from operations. In May, the company reported that first-quarter earnings had increased 17% to $3.6 million, or 25 cents a share, while revenue climbed 38% to $12.7 million.

Consolidated Water's strengths outweigh its somewhat disappointing return on equity. Earlier this month, the company said it had been added to the broad-market Russell 3000 Index and the small-cap Russell 2000 Index.

EnergySouth ( ENSI) is a holding company concentrated on the purchase, distribution, storage and transportation of natural gas in southwest Alabama. It has been rated a buy since May 2005.

The company's strengths include revenue growth that has outpaced the industry average and a pattern of EPS growth over the past year. The stock is expensive relative to its peers, but given its performance, the higher price is justified.